Government will overshoot 5.3% fiscal deficit target for FY13: Icra

ET Bureau|

Updated: Nov 27, 2012, 06.46 AM IST

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MUMBAI: The government may overshoot the upwardly revised fiscal deficit target due to lower revenue growth and its inability to cut expenses, said Icra, the local unit of global rating firm Moody's Investor Services, raising the spectre of a rating downgrade.

"Fiscal deficit is expected to exceed the revised target of 5.3% of GDP, in light of substantial under-recoveries on various regulated fuels already incurred," said Icra in a report. "Limited flexibility to control various types of expenditure and the likelihood of both tax and non-tax revenue receipts falling short of the budgeted amount" could boost government borrowing, it said without saying whether it would have a bearing on sovereign rating.

Finance Minister P Chidambaram is arguing there is no case for lowering India's sovereign rating due to high fiscal deficit. He has laid out a consolidation map to bring down fiscal deficit to 3% of the GDP by 2017. Economists are sceptical about it since he has not provided details of how he would achieve the target. India enjoys investment-grade rating now, which, even if downgraded by one notch, will push it to junk status. That could trigger some outflows, which may pressure the Indian currency again. "The potential worsening of the debt dynamics has added a greater degree of urgency to implementing growth-supportive policies and moving forward with fiscal consolidation," said Deutsche Bank in a separate report.

Even if fuel subsidies for the fourth quarter of fiscal 2013 are released a year after and disinvestment proceeds amount to Rs 25,000 crore, the fiscal deficit is still expected to be around 5.6% to 5.7%. Icra expects the slippage in the government's fiscal deficit relative to the budget estimates (BE) for 2012-13 to be funded by an enhancement in the announced long-term market borrowing programme for the fourth quarter of FY'13 by as much as Rs 50,000 crore.

Given the absence of a pickup in private investments despite an improvement in sentiments and the low transmission of the reduction in the cash reserve ratio since September, the GDP growth estimate for this fiscal is being cut to 5.4% from 5.7%, it said.

Icra also expects core inflation to be high because of a weak rupee and a generalisation of inflationary pressures related to high food prices. It expects the wholesale price inflation to average 7.5% to 7.7% in FY'13.